Asset Allocation for Accumulation - Include REITS?

[Maximus28]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.

I currently have investments in this portfolio: 50% S&P 500, 25% small cap value, 25% mid cap blend.

When performing back testing, the previous portfolio makes 2% less than this portfolio: 50% S&P 500, 25% small cap value, 25% O (Realty Income Corporation)

That back testing is since 1998, so this is not just recent returns chasing. In addition to higher returns, Sharpe and Sortino ratios are higher so this is returning more for less risk overall. What are your thoughts on introducing some form of REITs while accumulating?

I realize that O is a single stock, so in reality I would cap it to around 10 to 15% of the overall portfolio which still returns 1.3% more over the 24 year timeframe. (See Portfolio 2 in attached snip)

[vand]

I'm not going to say they're not worth it, but I would be very dubious that REITs can offer the benefits that most backtesting suggest they may.

Real estate is a relatively new asset class that has only become financialized into what we now know as REITs and other property plays in recent times.  Like with anything that becomes a packaged & financialized instrument they take on characteristics of a risk-on asset class.  I would not surprise me if the correlation between REITs and stocks is pretty much batting 1.0 going forward.

[ChpBstrd]

Yes, Realty Income has been one of the most successful REITs in the history of REITs, with a 15.3% compound annual return since 1994. Lots of other REITs have not done so well. Will O's performance continue? It's anybody's guess. The problem is, you cannot buy the past returns of O, only the future.

So if we want to ask whether to allocate 25% to "REITs" I suspect we need a bigger sample. Realistically, I hope you would be looking at funds of REITs, or at least 15-20 individual REITs, rather than hoping for another winner. I'm not sure what platform you are using to generate results, but maybe you could substitute VNQ, which goes back to only 2004 but at least offers some history through market cycles?

I am wary of Realty Income Co.'s 2% return on assets in a world of rising borrowing costs, and I am wary of their dependence on retail properties in a world of rising e-commerce. Those concerns apply to a LOT of REITs that look good on paper, but have significant issues under the surface. SPG is another example of an REIT I wouldn't touch with a ten-foot pole.

[SeattleCPA]

I should first disclose that I don't buy into the 100% US stocks or even 100% stocks argument. That point made...

What I use is David Swensen's asset allocation formula which allocates a 30% chunk of the portfolio to real assets and half of that real assets allocation ends up in REITs. This is simply an inflation hedge. The REIT returns are expected to be pretty modest.

P.S. Swensen suggested that people who own their own home probably shouldn't have 15% in the REITs because of their "home" direct real estate investment. Pretty confident he was right. FWIW...

P.P.S. The Swensen formula: 30% US stocks, 15% in Developed markets, 15% in REITs, 15% intermediate term treasuries, and 15% Tips... then last 10% in emerging markets. So 70% equities and 30% bonds.

[Villanelle]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.

I currently have investments in this portfolio: 50% S&P 500, 25% small cap value, 25% mid cap blend.

When performing back testing, the previous portfolio makes 2% less than this portfolio: 50% S&P 500, 25% small cap value, 25% O (Realty Income Corporation)

That back testing is since 1998, so this is not just recent returns chasing. In addition to higher returns, Sharpe and Sortino ratios are higher so this is returning more for less risk overall. What are your thoughts on introducing some form of REITs while accumulating?

I realize that O is a single stock, so in reality I would cap it to around 10 to 15% of the overall portfolio which still returns 1.3% more over the 24 year timeframe. (See Portfolio 2 in attached snip)

It is? 

[RWD]

https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

I personally have about 8% of my portfolio in VGSLX.

[MustacheAndaHalf]

P.P.S. The Swensen formula: 30% US stocks, 15% in Developed markets, 15% in REITs, 15% intermediate term treasuries, and 15% Tips... then last 10% in emerging markets. So 70% equities and 30% bonds.

I don't blame you, but many websites claim to translate famous investor portfolios - but there's no cost if they're wrong.  They attract visitors either way, and so it's important to go to the source.  The Yale Endowment Fund exists for Yale University, so below I use a link to yale.edu :

https://investments.yale.edu/about-the-yio

Notice the smallest allocation: Domestic Stocks!  Yet people telling you to imitate Swensen's Yale Portfolio suggest that should be the largest allocation.  So they are literally recommending the opposite of what Yale is actually doing.

The largest categories are Absoluete Return and Venture Capital - neither of which even shows up in the ETF based portfolio.  And finally, something I find very interesting and agree with - cash allocation has been rising sharply.  It's further evidence that experts like David Swensen are positioning out of U.S. stocks and into cash, which is my current approach as well.

[Tyler]

P.P.S. The Swensen formula: 30% US stocks, 15% in Developed markets, 15% in REITs, 15% intermediate term treasuries, and 15% Tips... then last 10% in emerging markets. So 70% equities and 30% bonds.

I don't blame you, but many websites claim to translate famous investor portfolios - but there's no cost if they're wrong.  They attract visitors either way, and so it's important to go to the source.  The Yale Endowment Fund exists for Yale University, so below I use a link to yale.edu :

https://investments.yale.edu/about-the-yio

Notice the smallest allocation: Domestic Stocks!  Yet people telling you to imitate Swensen's Yale Portfolio suggest that should be the largest allocation.  So they are literally recommending the opposite of what Yale is actually doing.

SeattleCPA is correct. The investments of the Yale endowment are different from Swensen's recommendations to normal people, and the proper source for his advice to individual investors is his book Unconventional Success. For a quick summary, read the blue sidebar in this article from Yale Alumni Magazine.

It's further evidence that experts like David Swensen are positioning out of U.S. stocks and into cash, which is my current approach as well.

FYI -- David Swensen passed away in 2021.

[MoseyingAlong]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.
.....

It is?

Definitely not accepted here or among the professionals I know.

[Malossi792]

Global cap weighted indices include REITs as per their market cap.
It doesn't get any more passive than that, just saying.

[ChpBstrd]

What I use is David Swensen's asset allocation formula which allocates a 30% chunk of the portfolio to real assets and half of that real assets allocation ends up in REITs. This is simply an inflation hedge. The REIT returns are expected to be pretty modest.

I've been wary of indirect inflation hedges ever since I looked up the correlation of gold and inflation. Although it's common sense that gold goes up when inflation goes up because inflation is a driver of mining costs, that result does not appear very strongly in the data. It could be a similar thing with RE.

In theory, inflation drives up the cost of construction, which drives up the cost of RE on the margin. In practice, it might be that we've grossly overbuilt malls, strip malls, warehouses, apartments, and offices, or that online shopping, JIT supply chain tech, and people's tendency to live alone vs. with roommates changes demand for these things. Rising interest rates (an effect of inflation) could drive down the profitability, and therefore value, of all types of RE.

[SeattleCPA]

P.P.S. The Swensen formula: 30% US stocks, 15% in Developed markets, 15% in REITs, 15% intermediate term treasuries, and 15% Tips... then last 10% in emerging markets. So 70% equities and 30% bonds.

I don't blame you, but many websites claim to translate famous investor portfolios - but there's no cost if they're wrong.  They attract visitors either way, and so it's important to go to the source.  The Yale Endowment Fund exists for Yale University, so below I use a link to yale.edu :

https://investments.yale.edu/about-the-yio

Notice the smallest allocation: Domestic Stocks!  Yet people telling you to imitate Swensen's Yale Portfolio suggest that should be the largest allocation.  So they are literally recommending the opposite of what Yale is actually doing.

The largest categories are Absoluete Return and Venture Capital - neither of which even shows up in the ETF based portfolio.  And finally, something I find very interesting and agree with - cash allocation has been rising sharply.  It's further evidence that experts like David Swensen are positioning out of U.S. stocks and into cash, which is my current approach as well.

Not sure this adds to the discussion but Swensen for Yale used an active investment approach he discusses in detail in another book called Pioneering Portfolio Management. There, he explains how an endowment fund like Yale's operates to do what they've done. In a nutshell, they go with alternative asset classes and accept happily a bunch of illiquidity. Unfortunately but predictably over the decades, many endowment funds that try that fail. The Pioneering book as I recall--and it's been a while since I've last read it but I've read it more than once--argues almost nobody should use active investing but if you do? You need to be like Yale.

The other thing to note is that Swensen clarified aspects of his asset allocation over time. E.g., he suggested in later interviews using (basically) intermediate term treasuries (a detail he left out of the book)... and he dialed down his allocation to REITs and dialed up his allocation to emerging market stocks due to growth in the value of the emerging markets. He also pointed out that investors probably wanted to tweak the percentages for their specific situation. E.g., the one I mentioned above which is a home owner who already has some protection against inflation doesn't maybe allocate 15% to REITs.

[Maximus28]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

[MustacheAndaHalf]

P.P.S. The Swensen formula: 30% US stocks, 15% in Developed markets, 15% in REITs, 15% intermediate term treasuries, and 15% Tips... then last 10% in emerging markets. So 70% equities and 30% bonds.

I don't blame you, but many websites claim to translate famous investor portfolios - but there's no cost if they're wrong.  They attract visitors either way, and so it's important to go to the source.  The Yale Endowment Fund exists for Yale University, so below I use a link to yale.edu :

https://investments.yale.edu/about-the-yio

Notice the smallest allocation: Domestic Stocks!  Yet people telling you to imitate Swensen's Yale Portfolio suggest that should be the largest allocation.  So they are literally recommending the opposite of what Yale is actually doing.

SeattleCPA is correct. The investments of the Yale endowment are different from Swensen's recommendations to normal people, and the proper source for his advice to individual investors is his book Unconventional Success. For a quick summary, read the blue sidebar in this article from Yale Alumni Magazine.

If you want to show what David Swensen said, I still disagree with that approach - with his advice to do something other than what he did.   Someone famous for investing one way, like Warren Buffet, who recommends the S&P 500, should not be represented by the S&P 500 (which I've seen - even though Buffet beat the S&P 500 for decades).

Similarly, leaving venture capital, leveraged buyouts and absolute return out of a portfolio means you follow what Swensen said, not what he did.  David Swensen was not famous for his advice to retail investors - he was famous for the performance of Yale's Endowment.  In my view, that is a significant distinction.

It's further evidence that experts like David Swensen are positioning out of U.S. stocks and into cash, which is my current approach as well.

FYI -- David Swensen passed away in 2021.

That's sad to hear.  In that obituary page, it describes his returns through June 2020.  The link I provided has portfolio allocations up to 2020, so it probably reflected his view of markets in 2020.

[Villanelle]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

Maybe we define "generally accepted" quite differently.  Certainly it is a small minority among investors I know, and i think posters here, that someone should be 100% stocks before retirement.  One article saying "it's not crazy" hardly makes it a generally accepted rule that you should do it. 

I think "stock only during accumulation" is a minority opinion.  A small minority.  So this entire thread is kinda based on a strawman. 

[Maximus28]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

Maybe we define "generally accepted" quite differently.  Certainly it is a small minority among investors I know, and i think posters here, that someone should be 100% stocks before retirement.  One article saying "it's not crazy" hardly makes it a generally accepted rule that you should do it. 

I think "stock only during accumulation" is a minority opinion.  A small minority.  So this entire thread is kinda based on a strawman.

I'm guessing you probably didn't read the article, but it is a pretty thorough analysis on varying amounts of equities vs bonds for the accumulator. In every scenario, 100% equities for at least the first half of accumulation always gave better results (for the aggressive saver), no matter the current market conditions i.e. CAPE ratios, inflation, etc. I would rather base my decisions on data, so no that is not a strawman.

What if you provided reasons, based in fact, as to why you don't agree with 100% stock? That would lead to a more productive conversation.

[Villanelle]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

Maybe we define "generally accepted" quite differently.  Certainly it is a small minority among investors I know, and i think posters here, that someone should be 100% stocks before retirement.  One article saying "it's not crazy" hardly makes it a generally accepted rule that you should do it. 

I think "stock only during accumulation" is a minority opinion.  A small minority.  So this entire thread is kinda based on a strawman.

I'm guessing you probably didn't read the article, but it is a pretty thorough analysis on varying amounts of equities vs bonds for the accumulator. In every scenario, 100% equities for at least the first half of accumulation always gave better results (for the aggressive saver), no matter the current market conditions i.e. CAPE ratios, inflation, etc. I would rather base my decisions on data, so no that is not a strawman.

What if you provided reasons, based in fact, as to why you don't agree with 100% stock? That would lead to a more productive conversation.

Huh?  Are you asking me why I disagree with your statement that holding no bonds is the generally accepted AA for accumulation? I disagree because most people hold bonds.   I think most people here hold at least some bonds (thus, "no bonds is not generally accepted").  Also, most experts recommend holding some bonds.  I just googled "should my portfolio include bonds" and got pages and pages of links saying it should. So... that's why I disagree with the statement that holding no bonds is the generally accepted way to go.  Because it isn't. 

Frankly, that has nothing to do with the articles analysis of what has historically performed best.  You said most people accept that no bonds is the way to go.  That is what I took issue with, because I don't think most or even many, agree with that.  You made a generalization that, as far as I can tell, is quite incorrect.  If you want to argue that it *should* be generally accepted not to have any bonds during accumulation, cool.  (Or argue that it shouldn't be and that people should have bonds and or REITs.)  Again, I'm just arguing with the statement that  it is generally accepted the investors should be 100% stocks. 

And I agree with all the many, many, many people who think that accumulators should diversify, including into bonds.  I think it can smooth out some volatility.  Personally, I do have a very low bond allocation, but that's only because my spouse has an income adjusted pension (starts collecting the day he retires).  For me, that has essentially the same role as bonds.  Otherwise, I'd probably be 20% bonds. 

[PDXTabs]

It’s not crazy at all to keep 100% equities right until you retire!

It isn't crazy, but it also isn't crazy to go 90/10 which arguably has better risk adjusted returns. And I write that as someone who is 100% equities.

[harvestbook]

Using a modified Merriman portfolio, I've been 5% US REIT and 5% international REIT at Vanguard for a decade and plan to stay there throughout. I doubt it will make much difference but I like the idea of a slightly broader weighting that isn't correlated 1:1 (even if it might not stray dramatically). I don't see much point in hoping it outperforms over five or 10 years, but perhaps over a lifetime it smooths things out a little.

[Maximus28]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

Maybe we define "generally accepted" quite differently.  Certainly it is a small minority among investors I know, and i think posters here, that someone should be 100% stocks before retirement.  One article saying "it's not crazy" hardly makes it a generally accepted rule that you should do it. 

I think "stock only during accumulation" is a minority opinion.  A small minority.  So this entire thread is kinda based on a strawman.

I'm guessing you probably didn't read the article, but it is a pretty thorough analysis on varying amounts of equities vs bonds for the accumulator. In every scenario, 100% equities for at least the first half of accumulation always gave better results (for the aggressive saver), no matter the current market conditions i.e. CAPE ratios, inflation, etc. I would rather base my decisions on data, so no that is not a strawman.

What if you provided reasons, based in fact, as to why you don't agree with 100% stock? That would lead to a more productive conversation.

Huh?  Are you asking me why I disagree with your statement that holding no bonds is the generally accepted AA for accumulation? I disagree because most people hold bonds.   I think most people here hold at least some bonds (thus, "no bonds is not generally accepted").  Also, most experts recommend holding some bonds.  I just googled "should my portfolio include bonds" and got pages and pages of links saying it should. So... that's why I disagree with the statement that holding no bonds is the generally accepted way to go.  Because it isn't. 

Frankly, that has nothing to do with the articles analysis of what has historically performed best.  You said most people accept that no bonds is the way to go.  That is what I took issue with, because I don't think most or even many, agree with that.  You made a generalization that, as far as I can tell, is quite incorrect.  If you want to argue that it *should* be generally accepted not to have any bonds during accumulation, cool.  (Or argue that it shouldn't be and that people should have bonds and or REITs.)  Again, I'm just arguing with the statement that  it is generally accepted the investors should be 100% stocks. 

And I agree with all the many, many, many people who think that accumulators should diversify, including into bonds.  I think it can smooth out some volatility.  Personally, I do have a very low bond allocation, but that's only because my spouse has an income adjusted pension (starts collecting the day he retires).  For me, that has essentially the same role as bonds.  Otherwise, I'd probably be 20% bonds.

I just googled how much should I save for retirement and I got pages and pages of results suggesting 5 to 15%. So applying your logic, I should be saving that amount because lots of google results suggest so? Lots of pages of articles in a google search is not data to suggest a certain investment style. Anyone can post those articles, so the quality of those articles wildly varies.

You have a point, maybe it isn't generally accepted. In the majority of content I read, it is accepted. However, I have fixed my first sentence: When considering 50+ years of stock market data, 100% equities for at least the first half of the accumulation stage yields the best results and that 100% equity window can arguably be extended to within 3 to 5 years of retirement.

[Maximus28]

Yes, Realty Income has been one of the most successful REITs in the history of REITs, with a 15.3% compound annual return since 1994. Lots of other REITs have not done so well. Will O's performance continue? It's anybody's guess. The problem is, you cannot buy the past returns of O, only the future.

So if we want to ask whether to allocate 25% to "REITs" I suspect we need a bigger sample. Realistically, I hope you would be looking at funds of REITs, or at least 15-20 individual REITs, rather than hoping for another winner. I'm not sure what platform you are using to generate results, but maybe you could substitute VNQ, which goes back to only 2004 but at least offers some history through market cycles?

I am wary of Realty Income Co.'s 2% return on assets in a world of rising borrowing costs, and I am wary of their dependence on retail properties in a world of rising e-commerce. Those concerns apply to a LOT of REITs that look good on paper, but have significant issues under the surface. SPG is another example of an REIT I wouldn't touch with a ten-foot pole.

Yes Realty Income Co.'s amazing returns have skewed the data. I re-ran numbers with VNQ in place of O and VNQ brought down the overall returns. In some risk parity models, I have seen portfolios use REIT funds like VNQ, use O by itself or use some combination for the REIT allocation. I probably don't have the trust in a single stock to invest a significant amount to it, but it is interesting to look at how rock solid O has been since 1994.

[Radagast]

- REITs are pretty well integrated into the market now, whereas 20 years ago they were not. Now they are included in regular indexes, especially small-cap value indexes.
- REIT returns are substantially explained by the small and value factors, without adding any notable REIT factor. (probably anything remaining would be explained by the bond credit risk factor)
- IMO directly held real estate would probably be less correlated with markets, and you might get an illiquidity premium, plus cheap leverage.
- Regarding what Swenson said versus what he did: using a Bill Bernstein metaphor, Swensen was Wayne Gretzky, he skated where the puck would be in the future. People who did what he did afterwards skated where the puck used to be, and mostly ended up as failures, trailing a conventional 60/40 portfolio. For example Harvard tried to imitate him and got their ass handed to them. In this case doing what he said would have been at least as good as what he did for basically everyone else.
- Apart from his published asset allocation, what Swensen said was to identify areas where A) you could consistently create top quartile active management returns, and B) it was worthwhile to do so, and if you could not reliably do both A and B then don't bother. For example he said he would never actively manage government bond investments because even if he could, the return was not worth the effort. He thought small investors could not realistically create consistent top quartile active management returns, except largely by chance.
- I think everyone should have at least a 10% bond allocation (and never more than 40%, or even better not more than 33%, except if you truly need all the money within 5-10 years). But if you have $10,000 in a checking account and invest $40,000 new money per year, I would also agree that effectively makes a $50,000 bond allocation, and you don't really need to add more until you have more than $500,000 or are within 5 years of retirement. Though I wouldn't fault you if you did.

[clifp]

I think there are a lot of folks who are close to 100% equities or maybe better expressed as zero percent bonds.

When my 10-year Penfed CD scame due, I effectively went to 0% bonds, except for a tiny amount of iBonds.
If I was in the accumulation phase I think making the case to hold bonds in the last decade would be a hard sell.

I'll start buying bonds when 10-year treasure hit 5% or 10-year TIPs have a coupon rate over 1%.

Until then bonds remain "return-free risk"

[SeattleCPA]

- IMO directly held real estate would probably be less correlated with markets, and you might get an illiquidity premium, plus cheap leverage.

I think this is pretty well established fact. At least for housing. I've often cited it, but will once again. "Rate of Return of Everything" paper discusses this.

- Regarding what Swenson said versus what he did: using a Bill Bernstein metaphor, Swensen was Wayne Gretzky, he skated where the puck would be in the future. People who did what he did afterwards skated where the puck used to be, and mostly ended up as failures, trailing a conventional 60/40 portfolio. For example Harvard tried to imitate him and got their ass handed to them. In this case doing what he said would have been at least as good as what he did for basically everyone else.

Another thing related to what someone does vs what someone recommends is, investors don't optimize in the same way. I don't think we know what Swensen used for his own personal investing. But a perpetual endowment fund has different characteristics than an individual living in developed democracy. Maybe Swensen used his "Unconventional Success" formula (which wasn't actually a formula, to be fair, but rather an example portfolio that reflected some guiding MPT-ish principles.)

Also I love and recommend things like cheap target retirement funds and lifestrategy funds. But I don't use them. I don't think that reflects hypocrisy on my part. For one thing, neither investment option existed when I was accumulating. I could only go down some other path.

- I think everyone should have at least a 10% bond allocation (and never more than 40%, or even better not more than 33%, except if you truly need all the money within 5-10 years). But if you have $10,000 in a checking account and invest $40,000 new money per year, I would also agree that effectively makes a $50,000 bond allocation, and you don't really need to add more until you have more than $500,000 or are within 5 years of retirement. Though I wouldn't fault you if you did.

+1

[NorCal]

I think REIT's are good to incorporate into a portfolio.  However, I view them as something to add a small allocation to, not a major chunk of the portfolio.

Also, I think the REIT index's aren't a good way to get exposure.  They are heavily weighted towards the mega-cap names which look more like fixed income instruments than an equity stake in a real estate business. 

I'd pick a small number of small-cap REIT's for 5-10% of your portfolio if you desire.

I currently hold a stake in CIO (office buildings) and MPW (hospitals), although I'll probably find a replacement for MPW at some point. 

[vand]

@Maximus28
If you are going to argue for 100% stocks, then why not push the boat out further and go 120% stocks, or 150% stocks, or 200% stocks, via leverage? Why not go 100% TQQQ?

Because Risk is the other side of the coin to Reward. You cannot have one without the other. It is my opinion that good investors look at return always through the lens of risk, whereas poor investors only consider the return.

If you only look at return then you are only looking at one half of the investing equation.

[NorCal]

@Maximus28
If you are going to argue for 100% stocks, then why not push the boat out further and go 120% stocks, or 150% stocks, or 200% stocks, via leverage? Why not go 100% TQQQ?

Because Risk is the other side of the coin to Reward. You cannot have one without the other. It is my opinion that good investors look at return always through the lens of risk, whereas poor investors only consider the return.

If you only look at return then you are only looking at one half of the investing equation.

I agree, but change the emphasis of the phrasing.

Long term investors evaluate the level of risk they're comfortable with and then see what level of returns they can get for that risk.

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

[PDXTabs]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

[NorCal]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

No data, just anecdotal experience. I started my investing journey in 2007 while interning at a venture fund surrounded by people that were aggressive investors.  2008 was a real wake up call to everyone. I knew many people who were 100% stocks that sold near the bottom and swore off investing for many years. I freely admit I made similar mistakes.

Those who had a risk-management approach did much better and made much more rational decisions. This included someone who was 100% stocks, but had a very conservative blue-chip value orientated stock portfolio.

[Radagast]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

One of the reasons why I still recommend a small bond allocation is because of "extra-spreadsheet risk." Stock market 2forthepriceof1 sales or better come with other factors that make it hard to take advantage of those sales, which might include:
Loss of a job
Less of a job (furlough)
Loss of a bonus
Less of a bonus
No pay raise
No credit available
Ditto for spouse/partner
and others.

Those things happened to a lot of people in 2020, 2009, 2001, 1960's, 1930's, and so on. So we can say for certain that regular paycheck investors took on more risk and had lower returns than BigERN's numbers showed, even if we don't know how much. 2009 didn't effect me because I had nothing to lose. But it had a very large effect on my peers, many of whom went years with no job or severely underpaid jobs. Many people I know would have been unable to continue regular investing and may even had to take money from retirement accounts. Unless you are still at a stage where you don't mind losing most of your stash, a bond allocation would be good to rebalance from or to provide sustenance from in those cases, and it is more common than pure returns suggest.

10% bonds minimum: not that much, really. Even Warren Buffet says to use that much. They can be savings bonds if you fear inflation, or extreme duration treasury bonds if you are afraid of missing out on returns (and are able to get a rebalancing bonus, which is definitely not guaranteed). Or 5% each!

[vand]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

There is plenty of research done that has shown that people who invest in the stock market do not capture the return of the stock market due to poor investor behaviour. It’s pretty much an open secret.

Here is one such source that shows how investors DIY investors pretty much concede all their advantage over a high cost active wealth manager:
https://citywire.com/wealth-manager/news/sjp-vs-hargreaves-which-offers-more-bang-for-clients-bucks/a1404178/print?section=wealth-manager


Historically, a 60/40 has provided 90% of the upside of a 100/0 with about 60% of the risk. Even if you are happy holding a 100/0 from the risk perspective,  the “no brainier” option is to use a leveraged 60/40 and bring it up to the same risk as an unleveraged 100/10 and increase your expected return past the 100/10.

[PDXTabs]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

There is plenty of research done that has shown that people who invest in the stock market do not capture the return of the stock market due to poor investor behaviour. It’s pretty much an open secret.

Here is one such source that shows how investors DIY investors pretty much concede all their advantage over a high cost active wealth manager:
https://citywire.com/wealth-manager/news/sjp-vs-hargreaves-which-offers-more-bang-for-clients-bucks/a1404178/print?section=wealth-manager

I don't think that is what this article says:
Does asset allocation explain performance differential?
The research found that asset allocation over time has been ‘fairly consistent’ from both SJP and HL.

Both appear to have reduced equity weightings, although cash was recycled into different asset classes, with SJP opting for bonds while HL favoured cash.

Numis said the averages were ‘fairly close in reality’ however, with equity holdings over 10 years at 66% for SJP and 69% for HL, while fixed income allocation was at 16% and 14% respectively.

‘On balance we therefore feel that the asset allocation has been broadly similar, both over time and comparing each company. Therefore, asset allocation in our view probably does not explain a meaningful difference in the actual client returns achieved historically,’ Numis said.

[Maximus28]

@Maximus28
If you are going to argue for 100% stocks, then why not push the boat out further and go 120% stocks, or 150% stocks, or 200% stocks, via leverage? Why not go 100% TQQQ?

Because Risk is the other side of the coin to Reward. You cannot have one without the other. It is my opinion that good investors look at return always through the lens of risk, whereas poor investors only consider the return.

If you only look at return then you are only looking at one half of the investing equation.

See my previous statement: "At the end of the day, the most important factor is each individual's personal risk tolerance."

I agree, investors always need to consider risk vs return. For me, when I can see large data sets that show an aggressive accumulator ALWAYS ends in a better position if they keep 100% equities for the first half of accumulation. That is enough information for me to hold 100% equities, even in the market during the downturns. I've been 100% equity since 2015, don't plan on bringing that down until I am 3 to 5 years from retirement. You also need to consider the risk of putting money in bonds when you may not being drawing on that money for decades, the return gap between stocks and bonds for that amount of time is a risk in itself.

For your comments about leverage, that is too much risk for me personally. A 3x leverage fund can almost go to 0 in a month, we saw that recently during the Covid crash. Furthermore, I think the volatility drags on those types of portfolios undermine what they can really return for you. They sound nice in theory, but in practice they don't perform as well.

[vand]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

There is plenty of research done that has shown that people who invest in the stock market do not capture the return of the stock market due to poor investor behaviour. It’s pretty much an open secret.

Here is one such source that shows how investors DIY investors pretty much concede all their advantage over a high cost active wealth manager:
https://citywire.com/wealth-manager/news/sjp-vs-hargreaves-which-offers-more-bang-for-clients-bucks/a1404178/print?section=wealth-manager

I don't think that is what this article says:
Does asset allocation explain performance differential?
The research found that asset allocation over time has been ‘fairly consistent’ from both SJP and HL.

Both appear to have reduced equity weightings, although cash was recycled into different asset classes, with SJP opting for bonds while HL favoured cash.

Numis said the averages were ‘fairly close in reality’ however, with equity holdings over 10 years at 66% for SJP and 69% for HL, while fixed income allocation was at 16% and 14% respectively.

‘On balance we therefore feel that the asset allocation has been broadly similar, both over time and comparing each company. Therefore, asset allocation in our view probably does not explain a meaningful difference in the actual client returns achieved historically,’ Numis said.

sure, it basically just shows us that avoiding high fees isn't nearly enough to capture market returns; investor behaviour trumps everything.. and one of the ways to have poor investor behaviour is an underappreciation of risk in a particular strategy

There's other research from Dalbar that corroborates
https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

[Villanelle]

In 2008, I held no bonds.  I was investing with a commission-based advisor (I know, I know) because investing seems scary and overwhelming, just as those advisors want it to.  I didn't for a single second--literally not a single second--consider selling anything.  I was in my lat 20s.  I had decades (even before I considered ER--I figured spouse and I would maybe be able to quite "early" at 60, if we played our cards right) before I needed any of it.  I knew the market was down, and then down a lot more.  I didn't even check balances, though I was well-aware that  I'd lost a ton of on-paper money. 

I won't argue that I'm a majority, but all-stocks made zero difference in my behavior.  I even continued monthly investments into 2 IRAs (myself and spouse) and a taxable account, at the same rates as prior to 2008.  Because I knew what was happening in 2008 was meaningless to me as a 28 year old with decades left to work.  (There is some irony in the fact that I ended up leaving full-time work in 2010 to be a trailing overseas spouse, and little did I know it then, but that was likely the last FT job I ever had!) 

And I think if I had been the type to sell, having 20% bonds likely wouldn't have prevented that.  Sure the overall numbers would have been a slightly less dark shade of red, but my stocks still would have been down the same %.  If that were going to spook me, it would spook me regardless of the bond numbers, I think.  And I don't think I'm all that unusual in that. 

[PDXTabs]

Whenever I see someone say they are 100% in stocks, I see someone who is more than 90% likely to dump everything in a major downturn.

If you have some data on that I'd love to see it. I don't think that I've ever in my life "dumped everything" although to be fair I've only been 100% equities for a few years.

There is plenty of research done that has shown that people who invest in the stock market do not capture the return of the stock market due to poor investor behaviour. It’s pretty much an open secret.

Here is one such source that shows how investors DIY investors pretty much concede all their advantage over a high cost active wealth manager:
https://citywire.com/wealth-manager/news/sjp-vs-hargreaves-which-offers-more-bang-for-clients-bucks/a1404178/print?section=wealth-manager

I don't think that is what this article says:
Does asset allocation explain performance differential?
The research found that asset allocation over time has been ‘fairly consistent’ from both SJP and HL.

Both appear to have reduced equity weightings, although cash was recycled into different asset classes, with SJP opting for bonds while HL favoured cash.

Numis said the averages were ‘fairly close in reality’ however, with equity holdings over 10 years at 66% for SJP and 69% for HL, while fixed income allocation was at 16% and 14% respectively.

‘On balance we therefore feel that the asset allocation has been broadly similar, both over time and comparing each company. Therefore, asset allocation in our view probably does not explain a meaningful difference in the actual client returns achieved historically,’ Numis said.

sure, it basically just shows us that avoiding high fees isn't nearly enough to capture market returns; investor behaviour trumps everything.. and one of the ways to have poor investor behaviour is an underappreciation of risk in a particular strategy

There's other research from Dalbar that corroborates
https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

I still don't think that says what you think it says if you read the original research. But I do agree that "investor behaviour trumps everything."
https://wealthwatchadvisors.com/wp-content/uploads/2020/03/QAIB_PremiumEdition2020_WWA.pdf

[Radagast]

I'm wondering if anyone else has looked into this recently. It is generally accepted to be 100% stocks when accumulating and then about 3 to 5 years from retirement (early or not) start transitioning your portfolio to a drawdown style portfolio.


It is?

Sure it is, note I said generally accepted. At the end of the day, the most important factor is each individual's personal risk tolerance. Personally, I am more than 5 years from retirement so I do not see a need to introduce any significant amount of bonds in my portfolio at this point in time and put a drag on portfolio growth. Would you suggest an individual just starting their accumulation to buy bonds? Probably not, unless that person has an extremely low risk tolerance from day 1.

Here is a summary of an article that discuss this at length on the earlyretirementnow blog: (https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/)

"It’s not crazy at all to keep 100% equities right until you retire!

At least if you’re planning an early retirement with 1) high contribution rates and 2) some flexibility about your retirement date. The 100% equities throughout would certainly be defensible if you find yourself in the middle of a bear market a few years before retirement. Then just keep the 100% equities and ride the subsequent bull market until you retire!

Even if you apply some more risk aversion, you will certainly still start with a 100% equity allocation, but you’d likely walk that down over the last 5 or at least 2.5 years before retirement. Also quite intriguing is that the high initial equity weight is defensible even when considering that the S&P 500 is at or close to its all-time-high.

So, for all of the folks out there who regularly make fun of me as the über-conservative retirement blogger and call me the Grinch of the FIRE movement, you all should take a positive and uplifting message away from today’s post: Before retirement, I certainly endorse a very gutsy and high-risk approach to investing. Only when you get close to retirement you want to take it down a notch and walk down the equity portion to well below 100%. And when retired you definitely want to lower the withdrawal rate when equities are expensive!"

So a better thought out version of why I don't strictly agree with 100% (although like I said I have always thought it's reasonable for the first half).

First, income varies and often correlates to the market. I think instead of a constant $1, BigERN might make an "investable income index." Lets say this index is equal to (Median Household Income) - (1.5x Median Household Poverty Level). So it's 2007 and MHI is $60,000 (2022 $). Poverty for the median household is $20,000, x 1.5 = $30,000. There is $30,000 of investable income. As a result of the Great Recession median household income declines $6,000. Not too bad, only 10%. But it is a 20% decline in investable income, and it corresponded to a market crash! So real world results for most people would not be as good as a constant $1 series. Anybody who was forced to stop contributing for any other reason during this period also would not have done as well, and there is more volatility in real life than in a spreadsheet.

Second, BigERN defines the most successful investor as the one who has the highest mean wealth after 10 years, and everyone else is accepting less success as a tradeoff for less risk. However, my definition of the most successful investor is the one who reaches FI in the shortest mean time. That is a maximization problem rather than a tradeoff problem, because low returns as a result of too many bonds and a low returns from a huge stock crash can both extend the time to FI. However there is some element of risk mitigation involved in minimizing time that isn't there in maximizing mean return. YOLO (why doesn't anyone say YOLO anymore? it was so iconic) and investing all in stocks even if it might mean another three or five years is a valid strategy, just not my style.